The Market's Response to the Quality of Earnings

Not only to the quantity of earnings that listed companies report, does the stock market also respond to the quality of earnings? This article creates 8 fundamental signals that are based on financial report to measure the quality of earnings, and supports the market's response to the quality of earnings using the data of Shanghai and Shenzhen stock market in China from 1995 to 1999. The statistical results suggest that the market's response is directly relative to the measure of the quality of earnings which is based on the fundamental signals of financial report, that is to say, earnings response coefficient of the samples group with high quality is more than that with low quality. The quality of earnings has significant explanatory power for earnings change one year ahead.